<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC. 600 FIFTH AVENUE
NEW YORK, N.Y. 10020
(212) 830-5220
================================================================================
Dear Shareholder:
The U. S. economy and financial markets continue to make the Eveready Bunny look
like an also-ran. Had a reasonably informed investor been told at the beginning
of 1998 that Japan and the Pacific Rim would experience such severe recessionary
conditions, that Russia would default on its debt, that Brazil would teeter on
the edge of a debt crisis, and that the U. S president would be impeached, the
expectation would certainly have been one of a precipitous collapse in corporate
debt, high yield, and equity security prices. Instead, bolstered by an enduring
("it keeps going and going") and strong U. S. economy with modest inflation, a
timely yet deliberate Federal Reserve easing policy, and International Monetary
Fund intervention, all of these asset classes performed positively for the year.
In the case of equities, performance was exceedingly strong.
The U.S bond market, as represented by the Lehman Aggregate Index, returned
8.39% since December 22, 1997, the inception date of the Back Bay Total Return
Bond Fund, through November 30, 1998. The primary driver of these returns was
the liquidity crisis which emanated from the Russian government default that
caused a subsequent liquidity panic in the leverage fund, Wall St. and
commercial banking community in the U. S. This was followed by a series of
Federal Reserve monetary easings totaling 75 basis points, including an
unexpected 25 basis points reduction in October to protect the U. S. and world
economies from financial collapse. As a consequence, ten and thirty year
Treasury rates fell by over one percent during the fall. For the same period,
the Class A shares of the Back Bay Total Return Bond Fund outperformed this
Lehman benchmark by 103 basis points, returning 9.42%. Major contributors to
this outperformance were the year and a half longer portfolio duration than that
of the index, significant over weighting in such defensive sectors of the
corporate market as electric utilities, cable/media, and telephones, and strong
security selection of financially improving BB rated corporate and sovereign
issuers.
The portfolio remains overweighted in the corporate, Canadian government, and
sovereign sectors as we enter 1999. Long U. S. government interest rates will
probably remain range-bound between 4.75% and 5.25% during the first part of the
year as investors assess the prospects for continued domestic economic growth.
While inflation remains benign, there are discomforting signs of a wind shift in
the trading levels of the U. S. dollar, in increasing budget spending
initiatives out of Washington, in rising health and benefit costs in corporate
America, and in the possibility that monetary easing is over. As long as the U.
S. economy experiences positive real growth however, corporate spread product
should continue to produce superior returns. We remain vigilant to any change in
our positive outlook for the domestic economy, which would cause us to reduce
portfolio overweighting to the corporate sector.
Sincerely,
\s\Edgar M. Reed
Edgar M. Reed
Executive Vice President and Chief Investment Officer
Back Bay Advisors, L.P.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOVEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
Comparison of change in value of $10,000 investment in the
Back Bay Funds, Inc. and Lehman Aggregate Index
Back Bay Funds, Inc. - Total Return Bond Fund
Performance Comparison Chart
The chart below represents the omitted graph.
Lehman Aggregate Index Back Bay Fund - Class A Back Bay Fund - Class B & C
<S> <C> <C> <C>
12/22/97 10,000 10,000 10,000
12/31/97 10,003 10,016 10,015
01/31/98 10,131 10,179 10,175
02/28/98 10,124 10,200 10,194
03/31/98 10,159 10,244 10,236
04/30/98 10,212 10,308 10,296
05/31/98 10,308 10,422 10,407
06/30/98 10,396 10,537 10,519
07/31/98 10,418 10,514 10,493
08/31/98 10,588 10,432 10,408
09/30/98 10,835 10,757 10,730
10/31/98 10,778 10,689 10,659
11/30/98 10,839 10,942 10,909
<CAPTION>
Past performance is not predictive of future performance
--------------------------------------------------------------------------------
Total Return (Unannualized) since inception 12/22/97:
--------------------------------------------------------------------------------
<S> <C>
Lehman Aggregate Index 8.39%
Back Bay Funds, Inc. - Class A 9.42%
Back Bay Funds, Inc. - Class B 9.09%
Back Bay Funds, Inc. - Class C 9.09%
--------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF INVESTMENTS
NOVEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Foreign Non-Convertible Corporate Bonds (16.92%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance & Banking (3.96%)
Merita Bank, 7.500%, due 12/29/49 1,000,000 $ 1,004,900
Merita Bank, 7.150%, due 12/29/49 300,000 295,125
Toyota Motor Credit Corporation, 5.625%, due 11/13/03 325,000 328,656
-----------
1,628,681
-----------
Forest Products (2.36%)
Abitibi Consolidated, 6.950%, due 04/01/08 1,000,000 967,500
-----------
Government (9.03%)
Canada Government Residual Strip, 0.000%, due 03/15/21 500,000 CAD 98,355
Government of Canada, 8.000%, due 06/01/23 1,300,000 CAD 1,152,672
Government of Canada, 5.250%, due 11/05/08 550,000 550,688
Province of Ontario Residual Strip, 0.000%, due 09/08/23 1,000,000 CAD 157,239
Republic of Argentina - Global Notes, 11.000%, due 12/04/05 500,000 523,125
Republic of Columbia, 7.625%, due 02/15/07 800,000 664,000
Republic of Panama, 8.875%, due 09/30/27 600,000 567,000
-----------
3,713,079
-----------
Oil & Gas Production (1.57%)
Gulf Canada, 8.375%, due 11/15/05 350,000 360,500
Petro Mexicano (Pemex), 8.850%, due 09/15/07 300,000 283,500
-----------
644,000
-----------
Total Foreign Non-Convertible Corporate Bonds (Cost $7,051,793) 6,953,260
-----------
<CAPTION>
Domestic Non-Convertible Corporate Bonds (53.21%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking (3.95%)
Bankers Trust Preferred Capital Trust II, 7.875%, due 02/25/27 1,000,000 1,066,250
State Street Institutional Trust, 7.940%, due 12/30/26 500,000 559,375
-----------
1,625,625
-----------
Cable/Media (3.45%)
Cablevision Systems Corporation, 7.875%, due 12/15/07 800,000 847,000
Cablevision Systems Corporation, 7.875%, due 02/15/18 200,000 202,000
Comcast Cable Communications, 8.500%, due 05/01/27 300,000 370,125
-----------
1,419,125
-----------
Electric Utilities (13.18%)
Arizona Public Service (PVNGS II), 8.000%, due 12/30/15 600,000 687,000
Calenergy Co Inc., 7.630%, due 10/15/07 300,000 315,750
Calenergy Co Inc., 7.520%, due 09/15/08 300,000 313,500
Cleveland Electric (Beaver Valley), 9.000%, due 06/01/17 750,000 853,125
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Domestic Non-Convertible Corporate Bonds (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Electric Utilities (Continued)
GTE North, 5.650%, due 11/15/08 1,000,000 $ 1,008,750
Niagara Mohawk Power, 7.250%, due 10/01/02 500,000 511,875
Niagara Mohawk Power, 7.375%, due 08/01/03 500,000 524,375
Niagara Mohawk Power, 7.625%, due 10/01/05 250,000 261,250
Public Service, New Mexico, 7.100%, due 08/01/05 150,000 154,125
Texas Utility Electric Capital Trust Prefund, 8.175%, due 01/30/37 300,000 330,750
United Utilities, 6.250%, due 08/15/05 450,000 455,063
-----------
5,415,563
-----------
Finance (1.36%)
Associates Corporation, 5.750%, due 11/01/03 550,000 558,937
-----------
Industrial (12.35%)
American Standard, 7.375%, due 04/15/05 345,000 349,312
Aramark, 7.000%, due 07/15/06 940,000 949,400
Ford Holdings, Inc., 9.300%, due 03/01/30 900,000 1,255,500
Great Atlantic & Pacific Tea Company, 7.750, due 04/15/07 650,000 646,750
Norfolk Southern Corporation, 7.050%, due 05/01/37 800,000 861,000
Safeway, Inc., 6.050%, due 11/15/03 225,000 225,844
U.S. Filter Corporation, 6.500%, due 05/15/03 800,000 788,000
-----------
5,075,806
-----------
Investment Bank/Brokerage (0.85%)
Lehman Brothers Holding, 6.125%, due 07/15/03 350,000 349,125
-----------
Manufacturing (Containers) (1.83%)
Owens Illinois, 7.800%, due 05/15/18 750,000 751,875
-----------
Media/Entertainment (6.25%)
News America, 8.000%, due 10/17/16 1,150,000 1,289,438
Time Warner, 9.125%, due 01/15/13 1,000,000 1,280,000
-----------
2,569,438
-----------
Telephone (9.99%)
AT&T Corporation, 8.625%, due 12/01/31 300,000 336,375
Comcast Cellular Holdings, 9.500%, due 05/01/07 1,000,000 1,077,500
LCI International, 7.250%, due 06/15/07 100,000 101,625
New England Telephone (MOPPRS), 6.300%, due 12/16/02 1,000,000 1,032,500
MCI Communications Corporation, 7.125%, due 06/15/27 1,400,000 1,557,500
-----------
4,105,500
-----------
Total Domestic Non-Convertible Corporate Bonds (Cost $21,291,665) $21,870,994
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
U.S. Government Agencies (13.71%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal National Mortgage Association, 5.750%, 04/15/03 1,000,000 $ 1,031,040
Federal National Mortgage Association, 6.000%, 05/15/08 1,000,000 1,053,020
Government National Mortgage Association, 8.000%, 09/15/26 833,249 867,621
Government National Mortgage Association, 7.500%, 12/15/27 784,007 810,711
Government National Mortgage Association, 7.000%, 05/15/28 744,624 763,002
Government National Mortgage Association, 7.000%, 06/15/28 491,795 503,933
Government National Mortgage Association, 6.500%, 10/15/28 600,000 606,558
-----------
Total U.S. Government Agencies (Cost $5,609,422) 5,635,885
-----------
<CAPTION>
U.S. Government Obligations (9.06%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Note, 5.500%, 03/31/00 2,000,000 2,022,560
U.S. Treasury Note, 6.625%, 07/31/01 1,000,000 1,049,920
U.S. Treasury Note, 4.750%, 11/15/08 650,000 651,008
-----------
Total U.S. Government Obligations (Cost $3,725,584) 3,723,488
-----------
<CAPTION>
Short-Term Investments (5.50%)
Commercial Paper (5.50%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
American Express Corporation, 5.000%, 12/01/98 303,000 303,000
House Hold Finance Corporation, 5.300%, 12/01/98 1,958,000 1,958,000
-----------
Total Short Term Investments (Cost $ 2,261,000) 2,261,000
-----------
Total Investments (98.40%) (Cost $39,939,464+) 40,444,627
Cash and Other Assets, Net of Liabilities (1.60%) 658,414
-----------
Net Assets (100.00%) $41,103,041
===========
+ Aggregate cost for federal income tax purposes is identical.
Aggregate unrealized appreciation and depreciation, based on cost for federal income tax purposes, are $677,767 and $ 172,604
respectively.
* Securities denominated in U.S. dollars unless otherwise indicated.
CURRENCY ABBREVIATIONS:
CAD-Canada
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at value (Cost $39,939,464)................................. $ 40,444,627
Cash.................................................................................. 935
Receivables:
Securities sold................................................................... 1,899,203
Dividends and interest............................................................ 593,617
Due from Manager...................................................................... 41,688
Deferred organization expenses........................................................ 37,613
---------------
Total assets................................................................ 43,017,683
---------------
<CAPTION>
LIABILITIES
<S> <C>
Payables:
Securities purchased.............................................................. 1,783,295
Capital shares redeemed........................................................... 37,500
Dividends......................................................................... 47,426
Accrued expenses and other liabilities................................................ 46,421
---------------
Total liabilities........................................................... 1,914,642
---------------
Net Assets............................................................................ $ 41,103,041
===============
<CAPTION>
Net asset value, offering and redemption price per share:
Class A shares, 3,983,219 shares outstanding.......................................... $ 10.32
===============
Class B shares, 104 shares outstanding.......................................... $ 10.32
===============
Class C shares, 104 shares outstanding.......................................... $ 10.32
===============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF OPERATIONS
DECEMBER 22, 1997 (COMMENCEMENT OF SALES) TO NOVEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Interest.......................................................................... $ 1,781,376
---------------
Expenses: (Note 2)
Investment management fee......................................................... 94,245
Administration fee................................................................ 90,581
Shareholder servicing fee (Class B)............................................... 2
Shareholder servicing fee (Class C)............................................... 2
Custodian expenses................................................................ 9,507
Shareholder servicing and related shareholder expenses............................ 30,555
Legal, compliance and filing fees................................................. 103,124
Audit and accounting.............................................................. 17,000
Directors' fees................................................................... 6,012
Amortization of organization costs................................................ 8,739
Miscellaneous..................................................................... 1,520
---------------
Total expenses................................................................. 361,287
Less:
Expenses paid indirectly................................................ ( 3,881)
Fees waived and expenses reimbursed..................................... ( 250,089)
---------------
Net expenses................................................................... 107,317
---------------
Net investment income................................................................. 1,674,059
---------------
<CAPTION>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C>
Net realized gain (loss) on investments............................................... 649,056
---------------
Net unrealized appreciation (depreciation) on:
Investments....................................................................... 505,163
Translation of assets and liabilities denominated in foreign currencies........... ( 387)
---------------
Net unrealized appreciation (depreciation)............................................ 504,776
---------------
Net realized and unrealized gain.................................................. 1,153,832
---------------
Net Increase in net assets resulting from operations.................................. $ 2,827,891
===============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
December 22, 1997
(Commencement of Sales)
to November 30, 1998
--------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C>
Operations:
Net investment income............................................................... $ 1,674,059
Net realized gain................................................................... 649,056
Net unrealized appreciation ........................................................ 504,776
-----------------
Increase in net assets from operations.............................................. 2,827,891
Dividends to shareholders from:
Net investment income:
Class A.......................................................................... ( 1,673,943)
Class B.......................................................................... ( 58)
Class C.......................................................................... ( 58)
Capital share transactions (Note 3)
Class A.......................................................................... 39,847,135
Class B.......................................................................... 37
Class C.......................................................................... 37
-----------------
Total increase (decrease)........................................................... 41,001,041
Net assets:
Beginning of period................................................................. 102,000
-----------------
End of period....................................................................... $ 41,103,041
=================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. Summary of Accounting Policies.
Back Bay Funds, Inc. (the "Fund") is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return by investing primarily in higher quality, fixed and floating-rate debt
instruments. The generation of income is a secondary objective. The Portfolio
has three classes of stock authorized, Class A, Class B and Class C. The Class A
shares of the Portfolio are available to corporate, institutional and individual
investors ("Institutional Investors") and either are sold directly to
Institutional Investors or are sold through financial intermediaries that do not
receive compensation from the Manager or Distributor. The Class B shares of the
Portfolio are subject to a service fee pursuant to the Portfolio's Rule 12b-1
Distribution and Service Plan and are sold through financial intermediaries who
provide servicing to Class B shareholders for which they receive compensation
from the Manager or the Distributor. The Class C shares of the Portfolio are
available to qualified retirement plan clients of life insurance companies
("Insurance Company Investors") and, as are the Class B shares, the Class C
shares are subject to a service fee pursuant to the Portfolio's 12b-1 Plan and
either are sold directly to Insurance Company Investors or are sold through
financial intermediaries who provide servicing to Class C shareholders for which
they receive compensation from the Manager or Distributor. Unlike the Class B
and Class C shares, the Class A shares are not subject to a service fee. In all
other respects, the Class A, Class B and Class C shares represent the same
interest in the income and assets of the Portfolio. The Fund's financial
statements are prepared in accordance with generally accepted accounting
principles for investment companies as follows:
a) Valuation of Securities -
Securities for which transaction prices are readily available are stated at
market value (determined on the basis of the last reported sales price, or
a similar means). All other securities for which market prices are not
readily available are priced on the basis of valuations provided by a
pricing service approved by the Board of Directors, which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The valuations provided by such pricing
service will be based upon fair market value determined most likely on the
basis of the factors listed above. Short-term investments that will mature
in 60 days or less are stated at amortized cost, which approximates market
value. All other securities and assets are valued at their fair market
value as determined in good faith by the Board of Directors.
b) Foreign Currency Translation -
Portfolio securities and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the exchange
rate of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities and income items denominated in foreign
currencies are translated into U.S. dollars at the exchange rate in effect
on the transaction date. When the Portfolio purchases or sells foreign
securities it will customarily enter into a foreign exchange contract to
minimize foreign exchange risk from the trade date to the settlement date
of such transactions.
The Fund does not separately report the effect of changes in foreign
exchange rates from changes in market prices on securities held. Such
changes are included in net realized and unrealized gain or loss from
investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
recorded amounts of interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange
rates of foreign currency denominated assets and liabilities other than
investments in securities held at the end of the reporting period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
1. Summary of Accounting Policies. (Continued)
c) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its taxable income to its shareholders. Therefore, no provision for
federal income tax is required.
d) Dividends and Distributions -
Dividends from investment income are declared daily and paid monthly.
Capital gains distributions if any, will be made at least annually and in
no event later than sixty days after the end of the Fund's fiscal year.
e) Organization Costs -
Organization expense are being deferred and amortized on a staight
line basis over a period of five years from the Fund's commencement of
operations. The proceeds of any redemptions by the original shareholder of
the initial shares will be reduced by a pro rata portion of any then
unamortized organizational expenses, based on the ratio of the shares
redeemed to the total initial shares outstanding immediately prior to the
redemption.
f) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
g) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Discounts and
premiums on securities purchased are amortized using the effective interest
method over their respective lives. It is the Fund's policy to take
possession of securities as collateral under repurchase agreements and to
determine in a daily basis that the value of such securities are sufficient
to cover the value of the repurchase agreements.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Portfolio pays an investment
management fee to Back Bay Advisors, L.P. (the "Manager") equal to .35% of the
Portfolio's average daily net assets.
Pursuant to an Administrative Services Agreement, the Portfolio pays to Reich &
Tang Asset Management L.P. (the "Administrator") an annual fee equal to .15% of
the Portfolio's average net assets up to $100 million, .125% of the next $150
million of such assets, .10% of the next $250 million of such assets and .075%
of such assets over $500 million, with a minimum monthly fee of $8,000.
Pursuant to a Distribution and Service Plan adopted under Securities and
Exchange Commission Rule 12b-1, the Portfolio and Reich & Tang Distributors,
Inc. (the "Distributor") have entered into a Shareholder Servicing Agreement
(with respect to the Class B and Class C shares of the Fund only). For its
services under the Shareholder Servicing Agreement, the Distributor receives
from the Portfolio with respect only to Class B and Class C shares, a service
fee equal to .25% per annum of the average daily net assets.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
2. Investment Management Fees and Other Transactions with Affiliates.
(Continued)
The Manager and the Administrator at their discretion may voluntarily waive all
or a portion of the Management Fees and Administration Fees and to voluntarily
reimburse the Portfolio's other operating expenses to the extent necessary to
maintain the Total Portfolio Operating Expenses at not more than .40%, .65% and
.80% of the Portfolio's average net assets with respect to the Class A, B and C
shares, respectively.
During the year ended November 30, 1998, the Manager and the Distributor
voluntarily waived investment management fees and Shareholder servicing fees of
$94,245 and $4, respectively, and reimbursed other operating expenses of
$155,840.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the statement of operations under the caption "Custodian expenses"
are expense offsets of $3,881. Included under the caption "Shareholder servicing
and related shareholder expenses" are fees of $23,589 paid to Reich & Tang
Services, L.P. an affiliate of the Administrator as servicing agent for the
Fund.
3. Capital Stock.
At November 30, 1998, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $39,949,209. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
December 22, 1997
(Commencement of Sales) to
November 30, 1998
----------------------------------------
Shares Amount
------ ------
Class A
-------
<S> <C> <C>
Sold......................................... 4,723,139 $ 47,413,044
Issued on reinvestment of dividends.......... 137,847 1,398,689
Redeemed..................................... ( 887,767) ( 8,964,598)
------------- --------------
Net increase (decrease)...................... 3,973,219 $ 39,847,135
============= ==============
Class B
-------
Sold......................................... -- --
Issued on reinvestment of dividends.......... 4 37
Redeemed..................................... -- --
------------- --------------
Net increase (decrease)...................... 4 37
============= ==============
Class C
-------
Sold......................................... -- --
Issued on reinvestment of dividends.......... 4 37
Redeemed..................................... -- --
------------- --------------
Net increase (decrease)...................... 4 37
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
4. Investment Transactions.
Purchases and sales of investment securities, other than short-term investments,
totaled $93,859,492 and $56,361,064, respectively. Accumulated undistributed net
realized gains on November 30, 1998 amounted $649,056.
5. Dividend Declaration.
On October 16, 1998, the Board of Directors declared a distribution from net
short-term capital gain of $0.163 per share payable on December 18, 1998 to
shareholders of record December 17, 1998.
<TABLE>
<CAPTION>
6. Financial Highlights.
December 22, 1997
(Commencement of Sales) to
November 30, 1998
--------------------------------------------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
Per Share Operating Performance
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period........... $ 10.00 $ 10.00 $ 10.00
--------- --------- ---------
Income from investment operations:
Net investment income....................... 0.59 0.56 0.56
Net realized and unrealized
gains (losses) on investments.............. 0.32 0.32 0.32
--------- --------- ---------
Total from investment operations............... 0.91 0.88 0.88
--------- --------- ---------
Less distributions:
Dividends from net investment income........ ( 0.59 ) ( 0.56 ) ( 0.56 )
Distributions from net realized gains....... -- -- --
--------- --------- ---------
Total distributions............................ ( 0.59 ) ( 0.56 ) ( 0.56 )
--------- --------- ---------
Net asset value, end of period................. $ 10.32 $ 10.32 $ 10.32
========= ========= =========
Total Return (not annualized) 9.42% 9.09% 9.09%
Ratios/Supplemental Data
Net assets, end of period (000)................ $ 41,101 $ 1 $ 1
Ratios to average net assets:
Expenses (net of fees waived and reimbursed)+ 0.41%* 0.66%* 0.66%*
Net investment income....................... 6.22%* 5.91%* 5.91%*
Management and shareholder servicing fees waived 0.35%* 0.60%* 0.60%*
Expenses reimbursed......................... 0.58%* 0.58%* 0.58%*
Expense offsets............................. 0.01%* 0.01%* 0.01%*
Portfolio turnover rate........................ 220.55% 220.55% 220.55%
* Annualized
+ Includes expense offsets.
</TABLE>
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BACK BAY FUNDS, INC.- TOTAL RETURN BOND FUND
INDEPENDENT AUDITOR'S REPORT
================================================================================
The Board of Directors and Shareholders
Back Bay Funds, Inc. - Total Return Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Total Return Bond Fund series of Back Bay
Funds, Inc. as of November 30, 1998, and the related statement of operations,
the statement of changes in net assets and the financial highlights for the
period December 22, 1997 (Commencement of sales) to November 30, 1998. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1998, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Total
Return Bond Fund series of Back Bay Funds, Inc. as of November 30, 1998, the
results of its operations, the changes in its net assets and the financial
highlights for the period indicated, in conformity with generally accepted
accounting principles.
\s\McGladrey & Pullen, LLP
New York, New York
December 28, 1998
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This report is submitted for the general information
of the shareholders of the Fund. It is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus, which includes information
regarding the Fund's objectives and policies,
experience of its management, marketability of
shares, and other information.
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BACK BAY
FUNDS, INC.
TOTAL RETURN BOND FUND
November 30, 1998
Annual Report
[GRAPHIC OMITTED]
Back Bay Advisors, L.P.
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